An Imperfect Trailing Strategy You Must Have

It’s 7:00am Sunday…

Most folks are slowly waking to a clear and mild autumn morning. The promise of a lazy start to a picture-perfect day beckons.

But not for some.

My day began at 5:10am with a buzzing alarm clock. Forget about a leisurely sleep-in. I’m about to join 12,000 people pounding the city’s pavements.

You see, a couple weeks ago was the ‘Sydney Morning Herald Half Marathon’. It attracts runners of all abilities — and I’ve been a regular for years.

So, what does an endurance race have in common with trading?

I’ll get to that in a minute. But first, let me tell you a short story…

Not an exact science

Of all the running events I do, this is one of the most spectacular.

The race begins at historic St Mary’s Cathedral. It then winds through the city streets, taking in sights like the Botanic Gardens, Barangaroo, The Rocks, and Sydney Harbour.

The scenery is a blur for most people. They are too busy running themselves to exhaustion. But this wasn’t the case for me. You see, I had an official job to do — I was one of 16 pacers.

Now, a pacer has an important role. They help a group of everyday runners achieve a goal race time. This means setting the pace and offering loads of encouragement.

My pacing group was the 100-minute runners. These people aim to complete the 21.1km route in less than one hour and 40 minutes. And it takes a lot of planning to get them there.

You see, pacing — like trading — is not an exact science. I always lose a portion of my group along the way. Some falter on the hills, while others fade in the final few kilometres.

No matter how hard I try, I know I can’t get everyone over the line.

The finish is always a highlight. It involves a 100-metre dash through Hyde Park. Cheering spectators spur the runners on for one final surge. It gives me a buzz every year.

With the clock counting down, I hit the line with the last of my group. Our time was 99 minutes and 57 seconds — barely a moment to spare.

Backslaps and congratulations follow. Elation briefly trumps exhaustion.

And then it happens…as it does every year.

Someone asks the question: How do I pace within seconds of the target?

Well, it largely comes down to preparation. But here’s the thing: I never know the individual outcomes until the end. Some runners will reach the 100-minute goal, but others won’t.

As I said before, pacing is not an exact science. My race strategy won’t work for everyone. But, if I stick to my plan, I’ll be sure to get more than a few across the line.

So, what’s the connection with trading?

Well, let me tell you…

Let stragglers go

Trailing stops follow a similar logic.

Just like pacing, they…

  1. Don’t have robotic precision; and
  2. You won’t get the ideal result on every occasion.

But, if you use them with consistency, a trailing stop can make a big difference.

Check this out…

Click to enlarge

Webjet Ltd [ASX:WEB] is a recent profitable trade. Quant Trader gave a buy signal in November 2015. The system then rode the trend for the next 12 months.

Now, have a close look at the chart…

You’ll see a red dotted line below the share price. This tracks the progress of the trailing stop. The system sells when the shares touch the line.

WEB hit its stop at $9.35 on 3 November 2016 — only two days before a lasting low. The shares would still be in the portfolio if the stop was just a few cents lower.

I sometimes get emails when this sort of thing happens. People tell me about the frustration of selling a stock, only to see it quickly rebound.

Yes, I know exiting near a low is disappointing. I’ve done this many times in my career. I believe it’s something all traders experience.

You see, there’s no way to fine-tune an exit stop to perfection. We only know how to tweak the levels in hindsight. Real-time trading doesn’t offer this luxury.

Remember this: A trailing stop’s primary objective is to protect your capital. It has no way to know the size of a pullback, or if a stock will ultimately recover.

Some people question the value of stops. They highlight trades like WEB and say it’s better to ride out the pullbacks. They reason that a stock will eventually bounce back.

It’s a bit like saying a pacer should slow down for a struggling runner. Maybe their goal is still reachable. They could be about to get their second wind.

But what if they don’t?

Have a look at this…

Click to enlarge

Some stocks — like some runners — just keep fading.

Vocus Group Ltd [ASX:VOC] was one of the ASX’s best stocks this decade. The shares rose over 21-fold (or 2,100%) between 2010 and May of last year.

Quant Trader gave a buy signal in November 2014 (the month the service went live). The system rode the trend until three months after the all-time high.

Now, here’s the thing. Some traders are reluctant to sell a faltering stock. I hear them say, ‘I’ll just give it a little bit longer.’ They believe a stock will get a ‘second wind’ if they give it time.

But this can be a huge mistake.

You see, the longer you delay selling, the harder it can become. I often hear of people riding a stock all the way to zero. They cling to the hope that a recovery is around the corner.

Some people will regret selling WEB. They’ll look back on it as a mistake. But this same discipline gets them out of stocks likes VOC. These are the ones that can ruin your portfolio.

I have no doubt about it: You must let go of weakening stocks. I believe it’s better to miss a rebound than risk riding a stock all the way to the bottom.

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s note: Exit strategy is one of the most important decisions you’ll make. Yet, despite its importance, selling is an afterthought for many traders. This can be a costly mistake.

Quant Trader uses a unique strategy to manage selling. The system’s algorithms tailor exit levels to each stock. This helps cull poor performers, while keeping you in winning trades longer. Some of the strategy’s wins include: Blackmores [ASX:BKL] at +353%, Vita Group [ASX:VTG] at +199%, and HUB24 [ASX:HUB] at +147%.

So, if you’re not sure when to sell…I strongly suggest you check out Quant Trader.

Try it. See if it makes sense to you. It could change the way you trade forever.

Quant Trader sources all images and charts.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia